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End Markets Aid Applied Industrial (AIT) Despite Challenges

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Applied Industrial Technologies, Inc. (AIT - Free Report) has been benefiting from strength in its technology, life sciences, off-highway mobile, pulp & paper, metals, lumber & wood plus industrial machinery end markets of late. Also, AIT’s cross-selling actions coupled with its focus on pricing and growth initiatives are likely to drive its performance. AIT predicts organic revenues to grow in a high single-digit percentage from the year-ago reported figure for fourth-quarter fiscal 2022 (ending June 2022).

Applied Industrial intends to strengthen and expand its businesses through acquisitions. AIT’s buyout of R.R. Floody (August 2021) boosted its product offerings in the automation technology space and expanded its reach in the U.S. Midwest market. Also, its acquired businesses of Advanced Control Solutions in October 2020 and Gibson in January 2021 added value to its automation solution offerings. In third-quarter fiscal 2022 (ended March 2022), buyouts contributed 0.4% to AIT’s revenues.

AIT’s commitment toward rewarding its shareholders through dividend payouts and share-repurchase programs is praiseworthy. For the nine months of fiscal 2022, AIT paid out dividends worth $38.6 million and repurchased shares worth $13.6 million. Also, in January 2022, Applied Industrial hiked its quarterly dividend rate by 3%. AIT had 318,000 shares left to buy back under its share repurchase program while exiting the fiscal third quarter.

However, escalating costs and expenses have been a major concern for AIT over time. In the fiscal third quarter, its cost of sales increased 16.8% on a year-over-year basis. Also, its selling, distribution and administrative expenses rose 10.8%. For fiscal 2022 (ending June 2022), management anticipates high costs of raw materials, labor woes and industrial supply-chain issues to adversely impact margins and profitability.

Given AIT’s extensive presence across international markets, its operations are subject to risks associated with unfavorable movements in foreign currencies and geopolitical issues. Foreign exchange headwinds had an adverse impact of 0.1% on its sales in the fiscal third quarter. In the quarters ahead, Applied Industrial’s overseas business might be depressed by a stronger U.S. dollar.

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In the past three months, this currently Zacks Rank #3 (Hold) stock has dropped 4.8% compared with the industry’s decline of 14.8%.

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